Digitizing the store

EXECUTIVE RESEARCH REPORT

DIGITIZI NG THE STORE

Executive Research Report | The Next Wave of Online and Offl ine Convergence 2

Connected consumers — constantly armed with technology and information — have

fundamentally changed the shopping paradigm. Since no single channel or touch point

defi nes the total customer experience, and today’s retail systems don’t move at the

speed of consumers, retailers must rethink existing operational models and technology

architectures. Brick-and-mortar stores and the legacy technologies that support their

operations are on the cusp of a refresh cycle and will experience the most radical

transformation to satisfy demands of the increasingly omni-channel consumer. This

has triggered retailers to take a fresh look at how they approach all consumer-facing

systems. Nearly 40% of retail executives we surveyed now believe that a single

platform will simplify the technology environment over the next three years and provide

seamless engagement and transactions throughout the shopping journey.

The National Retail Federation (NRF) teamed with research partner University of

Arizona and industry partner Demandware to survey more than 200 retail business and

technology executives in the US and Europe to quantify the convergence of POS and

e-commerce technology and its impact on digitizing the store.

KEY QUESTIONS

• How are consumers driving retail IT changes?

• Why are traditional POS and e-commerce technologies converging?

• What factors are driving future single platform investments by retailers?

• What functionality must a single platform deliver to meet retailer needs?

• What should retailers analyze and address to determine the right technology path?

Copyright 2014 The National Retail Federation. All rights reserved.

Executive Research Report | The Next Wave of Online and Offline Convergence 3

LANDSCAPE CONNECTED CONSUMERS DRIVE UNPRECEDENTED CHANGE

Today’s technology enabled, always-connected consumers have seemingly unlimited knowledge,

power, and expectations — and are therefore equipped to filter and prioritize where, how, and

when they engage with retailers. How they interact with retailers continues to evolve quickly: not

only are consumers changing how they shop across stores and online, even the digital component

itself is changing as consumers rapidly integrate smartphones and tablets into shopping. For

example, comScore reports that in Q3 2013, online consumers spent 44% of their time on retail

sites via smartphones and another 15% via tablets1. Conversely, personal computer share dropped

from 49% in February 2013 to just 41% in September.

As another example, according to University of Arizona’s 2013 report, Who are Digital Divas and

Why Should Retailers Care?2, a connected and influential digital consumer — the “Digital Diva”

— has emerged. “Digital Divas” comprise 22% of fashion shoppers, yet their purchasing power

represents 69% of all fashion spend — a combination of their direct spend (29%) and influenced

spend (40%). They visit an average of 3.4 destinations during their journey, primarily shopping at

physical retail stores (70%) and retailer websites (51%) (see Figure 1). Brick-and-mortar stores

are still important to Digital Divas, as they value the tactile nature of the in-store experience. And

because Digital Divas shop across multiple channels — using an average of 3.7 technologies along

with visiting multiple destinations — they expect fluid and highly relevant interactions, where their

context with the brand is never lost.

Since no single channel or touch point defines the total experience, retailers must rethink existing

operational models and technology architectures.

Digital Divas comprise

22% of fashion

shoppers, yet

represent 69%

of purchasing power.

Figure 1: Digival Divas are Connected and Influential

Divas Non-Divas

Source: Who are Digital Divas and Why Should Retailers Care?”. By University of Arizona, January, 2013

Fragmented:

Informed:

Social:

# of shopping destinations

# of product info sources

# of social networks


TECHNOLOGY MUST SUPPORT CONSUMERS AND OPERATIONS SIMULTANEOUSLY

Retail leaders surveyed globally cited the following top priorities (in order of importance) that

information technology must enable in the constantly changing face of retail:

Improve efficiency (automates processes and simplifies operations across channels)

Attract and retain new customers (operationalizes data and intelligence to provide relevant and personalized interactions)

Reduce enterprise costs (simplifies environment to remove redundancy and sustain margin)

Increase enterprise growth (supports new brand, channel, and geographic expansion with

adequate technical and commercial scale)

While improving efficiency and reducing costs will always be operational priorities, the ability for

information technology to support consumer strategies has risen towards the top. Almost half

of our US (48%) and EU (47%) survey respondents stated that information technology must

enable retailers to attract and retain new customers. In a world where consumers have ubiquitous

broadband, active social networks, and multiple mobile devices, retailers must leverage technology

as a competitive weapon and drive change further and faster.

CURRENT TECHNOLOGY CAN’T KEEP PACE

While consumers dictate and control the shopping process, it is not surprising that existing

infrastructure, architecture, and applications have strained to keep pace. Loosely coupled legacy

systems originally were implemented to solve specific problems for specific channels. The

proliferation of channels with which consumers now interact commonly results in:

• Redundant data that increases total cost of ownership from system maintenance and operational inefficiencies

• Inaccurate customer information that manifests itself in order, payment, and service miscues

• Siloed systems that stifle retailers’ ability to respond to market dynamics and execute growth initiatives

These barriers also slow enterprise innovation — most notably within brick-and-mortar locations.

For example, only 26% of retail organizations surveyed provide capabilities that allow consumers

to interact and transact with the brand within the physical store via their mobile device. Adoption

differs dramatically by geography — 31% of European retailers versus 22% of US retailers in our

survey provide such capabilities.

Business priorities cannot be effectively executed with the limitations of current complex and

disparate technology environments. With the risk of dissatisfied customers and lost revenue,

retailers are defining a consolidated architectural approach to more effectively manage consumer

engagement and transactions across channels.

OUTLOOK DIGITIZING THE STORE – THE NEXT WAVE OF TECHNOLOGY CONVERGENCE

Since the advent of the electronic cash register in 1974, traditional store-based POS has managed

nearly 100% of retail transactions. It took thirty years and the emergence of the internet for another

technology — and channel — to chip away at the status quo. Based on a significant annual growth

rate, Forrester Research predicts that e-commerce will grow to $262 billion in 2013 and reach $371

billion by 2017 in the US alone, when it will account for 10% of all retail sales3. Perhaps even more

significant, Forrester estimates that half (49.5%) of total U.S. retail sales today are impacted by the

Only 26% of retail

organizations surveyed

provide capabilities

that allow consumers

to interact and transact

with the brand within

the physical store via

their mobile device.

1

2

3

4


Web in some way — comprising both 8.4% in direct e-commerce sales and an additional 41.3%

of U.S. retail sales that are influenced by shopping activity of some kind that consumers conduct

online before buying in stores or elsewhere4.

Over the past 15 years, e-commerce functionality, architecture, and extendibility that were designed

for online shopping has surpassed store POS applications. As a result, traditional POS, call center,

and mobile technologies that directly interact with consumers are increasingly being supplanted by

e-commerce to establish a single consumer transaction platform (see Figure 2).

SINGLE CONSUMER TRANSACTION PLATFORM IS EMERGING AS A SOLUTION

The new retail reality will be better served by a single platform at the center of the consumer

shopping experience. According to our survey, nearly 40% of retailers are considering a single

consumer platform to manage interactions and transactions across channels (see Figure 3).

Figure 2: Consumer-facing Technologies Converge

Figure 3: Retailers Consider Single Platform Across Channels

Nearly 40%

of retailers are

considering a single

consumer platform to

manage interactions

and transactions

across channels.

Mobile Commerce

Copyright National Retail Federation. Unauthorized reproduction and distribution prohibited. All rights reserved.

TraditionalPOS

Call Center

Traditional Ecommerce

Relev

ance

ConsumerTransactionPlatform

Global

North America

Europe

Undecided: 32.8%

Is your organization considering a single consumer interaction and transaction platform across channels?



This single transaction platform operates as the common system of interaction to bridge the virtual

and physical shopping worlds. It consolidates and manages key data elements, business rules, and

functionality that historically lived in multiple systems to deliver a seamless shopping experience

across channels (see Table 1). While merchandising, marketing, supply chain, and business

administration applications continue to be the systems of record in many cases, the platform is

the hub that directly supports customer engagement and flexible transactions throughout the

shopping journey.

Multiple Systems Single Platform

CUSTOMER

INTELLIGENCE

Customer information managed in applications by channel are often inaccurate and redundant

Single view of customer data (preferences, demographics, shopping history) increases accuracy and enables retailers to effectively execute dynamic segmentation and personalize interactions

PRODUCT

CONTENT

Product images, attributes, and data created and managed in silos and frequently not accessible to store associates

Commerce and content combined to streamline workflow and allow users to synchronize product data across digital channels with speed and accuracy

INVENTORY

AVAILABILITY

Inventory dedicated to specific channels with limited capability – or manual process – to order between channels

Accurate inventory visibility in real time across multiple locations enables key omni-channel capabilities like buy online and pickup in, or ship from, store

ORDER

VISIBILITY

Limited visibility of purchase or order lifecycle from one channel to another

Order status, history, and details are exposed to associates and consumers from anywhere

PROMO

OPTIMIZATION

Prices and promotions are specific to channel and difficult to redeem as applications don’t recognize codes

New prices and promotions are quickly configured for redemption based on channel, device, or segment

With simplified architecture, synchronized data, and real-time intelligence, retail leaders stated that

a single platform should address the following top consumer-focused initiatives:

Enhance customer experience (provide seamless interactions no matter what channel or device with which they choose to engage)

Standardize business processes across channels (increase internal efficiency among traditionally disconnected business units and functions)

Increase store associate productivity (not only drive down costs, but more importantly arm

associates to enhance interactions with customers and increase conversion)

POS REFRESH TRIGGERS SINGLE PLATFORM INVESTMENTS

There will be significant store investments as retailers aggressively break with tradition and launch

new store formats, revamp aging locations, test new concepts, and bring digital capabilities into the

four walls. 80% of retailers surveyed expect to maintain or increase store technology investments

over the next three years.

Many of these investments are targeted at POS, with 70% of retail executives reporting that their

organization is currently deploying or planning to refresh its existing software in the next three years

(see Figure 4). This refresh cycle — which has historically ocurred approximately every 12 years

— has prompted technology leaders to rethink traditional store-centric software, along with other

consumer-facing technology, and consider a single commerce instance across channels.

70% of retail

executives report that

their organization is

currently deploying or

planning to refresh its

existing POS software

in the next three years.

1

2

3


Given its more modern and flexible architecture, e-commerce software is emerging as the most

logical approach to evolve and establish a single platform. These scalable applications handle

robust functionality and data, and are already the backbone for many call centers and mobile

optimized sites. The next frontier is traditional store-based POS.

While traditional POS software has been a mainstay in physical stores — enabling reliable and

efficient transactions — it is proving difficult to extend functionality across channels because the

legacy architecture is generally closed, requires heavy customization, and is designed for a single

location. According to our survey, twice as many retailers globally plan to leverage e-commerce

(38%) over traditional POS (19%) for their next-generation store software (see Figure 5).

Furthermore, only 23% of retailers in the US and 13% of retailers in Europe are considering

traditional POS for their next-generation POS software. This trend varies by retail segment, but

clearly speaks to a tipping point in the store software market as retailers grasp that they must find a

more flexible solution that knits together formerly disparate customer touch points.

Twice as many

retailers globally

plan to leverage

e-commerce (38%) over traditional POS

(19%) for their

next-generation

store software.

Figure 4: Industry on Cusp of Significant POS Software Refresh Cycle

Figure 5: E-Commerce is Top Consideration for Next POS Software Investment

Keeping Core POS 25.30%

Upgrading Core POS 22.70%

Planned for 2014 21.00%


Deployment in progress 7.00%

Finished implementation 6.10%


Is your organization replacing its Core POS software by acquiring new software?


In thinking about your next-generation store POS, what types of software applications is your organization considering?


% o

f res

pond

ents

US

Europe

EcommercePlatform

ERP VendorApplication

Undecided Traditional POSBest-of-breedMobile Application

CRM


Retailers already are extending robust e-commerce functionality into stores to leverage the same

product, order, and customer data that is used for online browsing, purchasing, and service. For

example, arming store associates with extensive customer intelligence makes them more effective

brand ambassadors. The U.S. and European retailers surveyed rated guided selling (63% in US)

and clientelling (50% in Europe) as some of the most important digital functionality to increase

loyalty and conversion in brick-and-mortar locations (See Figure 6). With so many sophisticated

analytics tools used in the digital shopping experience, not applying similar capabilities to the

physical world would be a significant missed opportunity and direct hindrance to growth.

Retailers also rated inventory search (73% in the U.S. and 49% in Europe) and store fulfillment (60%

in the U.S. and 50% in Europe) as important digital functionality in stores. With consumers weaving

between channels throughout their shopping journey, it is no surprise that retailers want to expose

inventory from numerous sources of supply and leverage stores to efficiently fulfill orders when

appropriate. Endless aisle is an important byproduct of these capabilities, as store associates can

prevent walked sales by providing customers inventory visibility across the enterprise and complete

secure transactions on the sales floor.

Retailers rated guided selling and clientelling

as some of the most

important digital

functionality within

physical stores.

Figure 6: Retailers Want To Embed Ecommerce Functionality Into Stores

Inventory Search

Guided Selling

Store Fulfillment

US Europe

Assuming the convergence of shopping processes and technology across retail channels over the next three years, what functions typically found online should retailers make available to store associates on a mobile device?


Geofencing andGeotracking

Geofencing andGeotracking

Store Fulfillment

Clientelling

Inventory Search


To influence decisions and enhance service, retailers want to embed capabilities such as guided

selling, clientelling, and endless aisle into browsing on the sales floor in addition to purchasing

at the till. Infusion of these digital capabilities into the store has a major impact on traditional

and handheld hardware investments. Our survey suggests that traditional hardware is the top

investment priority for 54% of retailers, and handheld hardware is the top priority for 30% of them

globally (See Figure 7). The in-store cash wrap may not go away entirely — store associates likely

will still need a place to provide service, bag merchandise, and perform certain transactions — but

the traditional terminals will be replaced by more nimble, open, and mobile alternatives.

NEXT STEPS RETAILERS MUST PROACTIVELY ADDRESS KEY TECHNOLOGY IMPERATIVES

While many retailers believe that investments in a single transaction platform to digitize the store

will enable them to move at the speed of consumers, they need to consider the following three

overarching imperatives to take advantage of this unprecedented change that the retail industry

is experiencing.

• Understand Market and Internal Landscape: Retailers must understand both the broader marketplace and current state of technology solutions, as well as the internal organization and key stakeholders.

> Navigate the Vendor Landscape: One-third of the retail executives we surveyed report that their organization has not decided if a single platform will play a role in their technology strategy. The uncertainty is driven primarily by the nascent technology landscape and risk from significant organizational change. According to these retailers, the top challenge with a single consumer transaction platform is independent software vendors may not have a comprehensive or proven solution. Retailers should engage vendor partners to understand how their vision and roadmap aligns.

Hardware Investments

Increase to Support

Consumer Strategies

Figure 7: Store Hardware Investments Rise to Help Digitize the Store

What are your organization’s top investment priorities for store hardware in the next three years?


TraditionalPOSHardware

HandheldMobileDevices

DigitalSignage

Free-standingKiosks

RFID Tags &Readers

Tra�cTrackers

Tra�cCounters

US

Europe

% o

f res

pond

ents


> Wire Your Organization for Change: We have observed that organizational issues can further exacerbate uncertainty, as neither the e-commerce team nor the stores team wants to sacrifice current — if also imperfect and largely incompatible — solutions for their part of the business. Retailers should engage the business leaders within the company to gain consensus on a path forward and build shared requirements for a new common transaction platform.

• Establish Technology Roadmap: Retail executives we surveyed also cited as challenges complex migration of legacy systems to the new environment and the need for significant capital investment for a “big bang” approach. The transformation to extend a singular platform across channels — particularly into physical stores — won’t and can’t happen overnight. Retailers need to develop their own technology roadmap that defines success, supports business initiatives, and defines a path with clear milestones. Three key technology components of particular interest include:

> Consider the Cloud: Our survey shows that retail executives are currently considering both cloud (30%) and on-premise (19%) options for their POS software applications — while a full 51% have not formed a preference yet. Consumer engagement and transactions can no longer take place in isolation. Connectivity and security issues that historically hampered the ability to manage data and applications centrally in the cloud have diminished, and therefore the need to replicate and integrate this information in multiple data centers or backrooms is going away. Retailers should examine how to leverage the cloud to centrally manage consumer-facing systems, offload infrastructure maintenance, and provide elastic scalability for peak usage and growth.

> Mobilize and Empower Store Associates: As noted earlier, even some of the tech-savviest consumers — the Digital Divas — still rely heavily on the physical store experience as part of their path to purchase, and store associates are the biggest brand ambassadors. Savvy retailers will move store associates from behind the register, arm them with the same information that consumers have, provide training and incentives, and empower them to leverage capabilities — hardware and software — as stores are digitized. Two-thirds of retailers surveyed indicated that all of their district/regional managers and store managers do or will use these mobile devices in the field over the next three years; only one-third, however, report that all of their store associates have access to these mobile devices. The data shows that retailers have yet to realize the full potential of their investment in mobile devices - currently only half (52%) use smartphones and one-third (33%) use tablets to access POS software in the field. However, anticipated adoption of such hardware is pivotal in the transformation to a single consumer transaction platform.

> Invest in Wireless: 48% of survey respondents cited wireless connectivity as the major challenge they faced when using mobile devices in the field (followed by associate training and device theft and breakage). Connectivity concerns will dissipate as wireless becomes more pervasive, networks enhance reliability, and retailers leverage consumer-grade wireless to increase bandwidth. Retailers should leverage initiatives such as guided selling, clientelling, and endless aisle — all of which have the potential to increase service and revenue — to help fund wireless investments.

• Drive Continual Innovation: Consumer demands are changing at a rapid pace and innovation is currency in the shopping experience. Innovation and speed are not one-time events but instead must become standard operating procedure — made possible by a flexible and scalable platform. Retailers need to create the ability for employees to experiment quickly and extend capabilities to channels, devices, and geographies without the traditional costs due to administrative and system complexity. As part of this internal evolution, retail executives need to drive speed into environments so businesses can iterate and innovate faster — the time from inception to delivery into live operation must accelerate.

Retail executives are

currently considering

both cloud (30%)

and on-premise

(19%) options

for their POS

software applications.


METHODOLOGY AND RESPONDENT PROFILE

The National Retail Federation (NRF) collaborated with research partner University of Arizona, and

industry partner Demandware, to survey retail business and technology executives to quantify the

convergence of store and digital technology and its impact on digitizing the store. Survey data was

collected from online panelists – 125 in the U.S., 38 in the U.K., 35 in France, and 33 Germany

– during the fall of 2013. Organizations represented various retail segments, and individual

respondents spanned business and technology leadership positions (See Figure 8).

Figure 8: Respondent Organizations and Roles

End Notes

1. “State of the U.S. Online Retail Economy in Q3 2013”, by comScore, November 2013 (see www.comscore.com)

2. “Who are Digital Divas and Why Should Retailers Care?”, by University of Arizona, January 2013 (see www.demandware.com)

3. “US Online Retail Forecast, 2012 To 2017”, by Sucharita Mulpuru, Forrester Research, March 13, 2013 (see www.forrester.com)

4. “60% of U.S. Retail Sales Will Involve the Web by 2017”, by Amy Dusto, Internet Retailer, October 30, 2013 (see www.internetretailer.com)

Other 26.32%

Specialty Non-Apparel 23.68%

Apparel and Accesories 18.86%

Groceries and Food Service 12.72%

Outdoor and Sporting 7.89%

Health and Beauty 7.46%

Footwear 3.07%

What is the primary retail segment of your organization?

CIO/CTO 36.0%

VP Retail/DTC 18.8%

COO 17.0%

VP/Director IT 13.0%

VP/Director Store Operations 11.4%

VP/Director Ecommerce 4.0%

What is your organizational position?


Research Partner: Industry Partner:

National Retail FederationNRF is the world’s largest retail trade association, representing discount and department

stores, home goods and specialty stores, Main Street merchants, grocers, wholesalers,

chain restaurants and Internet retailers from the United States and more than 45 countries.

Retail is the nation’s largest private sector employer, supporting one in four U.S. jobs —

42 million working Americans. Contributing $2.5 trillion to annual GDP, retail is a daily

barometer for the nation’s economy. NRF’s This is Retail campaign highlights the industry’s

opportunities for life-long careers, how retailers strengthen communities, and the critical

role that retail plays in driving innovation.

DemandwareDemandware, a leader in digital commerce, enables the world’s premier retailers to move

faster and grow faster in the changing face of retail. Demandware’s enterprise cloud

platform minimizes the costs and complexities of running global, omni-channel commerce

operations, and empowers retailers to respond with speed and agility to new market

opportunities and continually evolving consumer expectations.

University of ArizonaThrough a strong partnership with business and industry, the University of Arizona’s

Retailing and Consumer Sciences program and Terry J. Lundgren Center for Retailing bring

together the resources and expertise of academia and the retail industry with a shared goal

of developing strong future retail professionals. Students have unique opportunities for

research, career exploration and development, internships, professional in-class speakers

and industry tours.

Copyright 2014 The National Retail Federation. All rights reserved.